Billionaire investor Ray Dalio diagnosed the current market environment as being “80% of the way” to the historic bubbles of 1929 and the dot-com bust of 1999.
- The QQQ is moving lower. See the real-time price action here.
Speaking on CNBC's Squawk Box Thursday, the Bridgewater founder predicted that the current market bubble will burst, but his advice for investors was unexpectedly bullish for the immediate term: Hold your positions.
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Dalio said his “bubble gauge” is flashing red, driven by high leverage, a flood of inexperienced retail buyers and dangerous optimism.
He pointed specifically to the massive concentration of wealth in a handful of tech names -- referencing the AI fever surrounding NVIDIA Corp. (NASDAQ:NVDA) -- as a defining characteristic of this cycle.
However, identifying a bubble and timing its burst are two different matters, according to Dalio.
“A lot can go up before the bubble bursts,” he explained.
He argued that bubbles are rarely self-correcting and that they require a specific catalyst, or “pricking,” to pop.
"The picture is pretty clear, in that we are in that territory of a bubble," Dalio said. "But we don't have the pricking of the bubble yet."
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Historically, the catalyst has been the Federal Reserve tightening monetary policy to combat inflation.
With the Fed not currently signaling the aggressive rate hikes required to pop the asset balloon, Dalio suggests the market has room to expand.
Selling now could mean missing out on the final, often euphoric, leg of the rally.
Ultimately, Dalio's message is one of tactical caution. The party isn’t over, but the music is getting dangerously loud.
"Don't sell just because there's a bubble," Dalio said. "But if you look at the correlations with the next 10 years' returns, when you are in that territory, you get very low returns."
For now, investors are dancing on the edge of a cliff--and Dalio suggests they keep dancing, but keep one eye firmly on the exit.
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